Sound industrial relation is landmark for economic development. Industrial disputes are common phenomenon around the world. If they are not settled in timely and proper manner, it becomes serious menace to the society. Hence, they require early solution, if not to eradicate then at least to mitigate them in the very beginning. Employers paid their sole attention in their investments, services and industrial improvements including production and supply whereas employee uses their best efforts in terms of knowledge, skills and labor. Traditional concept of master and servant has been shifted to employer and employee and they are considered to be the two sides of a coin and their equal efforts and satisfaction are must. In this reference, the Supreme Court of Nepal has also pronounced in the case of Hulas Metal Craft v. Ministry of Industry and Commerce[i] that there requires balancing the relation between employer and employee as the disputes will have potential risk in the national economy. It is therefore sound, adequate and balancing laws related to labor and employment is must in each economy. In this background the new labor laws and regulation has been instrumental in Nepal.

Realizing the importance of balancing the relation of employee and employer and managing industrial relation, the year 2017 and 2018 became landmark in Nepal. Highly awaited Labor Act 2017, Contribution Based Social Security Act 2018 has been enacted by the Legislative Assembly apart from the adoption of Labor Rule 2018 and Contribution Based Social Security Regulation 2018. Upon enactment of these Acts, it is expected that the laws will create new dimension in the labor market by balancing best interest of employer and employee.

The Labor Act 2017 has recognized in its preamble that the purpose of enactment is because of the requirement to ensure laborers' rights, benefits and facilities in one side and on the other to balance between the workers and employers by securing their rights and duties for promoting sound industrial relation and elimination of all forms of exploitation to increase in industrial productivity.

The Labor Act 2017 has introduced various new provisions and interpretation the terms salary to include basic salary and allowances. The employer is defined to denote company, private firm, partnership firm, cooperative and other organization registered and operated as per prevailing laws having objective of earning profit or for non-profit and also includes International Non-Governmental Organization (INGOs) under non-profit enterprises as it was under confusion previously. In addition the Labor Act 2017 has also introduced mandatory requirement of employment agreement and appointment letter, issuance of  experience letter, regulation and licensing of outsourcing entities, categorization of employees, social security including gratuity entitlement from the first day of service, extension of maternity leave and benefits including paternity leave, sexual harassment at workplace and penalty, performance appraisal, mandatory insurance against medical and accidental, wider and clear procedure of dispute settlement, compulsory framing of policy for health and safety, festival allowances and likewise. Among many new dimensions introduced, Labor Audit is one of the important aspects of Labor Act 2017.


Inpromoting the proper implementation of laborlaw, for the first time in history of Nepali legislation, the requirement of Labor Audit was envisaged. The Labor Act 2017 has made mandatory provision of conducting Labor Audit by employer.Labor Audit is one of the fundamentalsto correct the imbalance of power between the employee and the employer by protecting their various rights. Like any financial audits which are undertaken annually to evaluate financial status of an employer, Labor Audits provide a systematic means for employers to determine their exposure to employment lawsuits and to minimize potential liability by taking preventative action. Provision of Labor Audit is thus introduced to determine the employees' attitude towards the employer, to identify possible areas of vulnerability and to review the compliances of the employer's policies and procedures along with the prevailing local labor laws.

In this reference, Labor Act 2017 prescribes the requirement of Labor Audit to be done by employer in order to identify whether the work-related activities are done through due process of prevailing Labor Act 2017, Labor Rules 2018 and other existing laws of Nepal and prepare a report of it.[ii]Aslabor law audits are integral in today’s industrial world, for the proper functioning of and safety for employees and assurance of availability of minimum contents guaranteed by the labor laws and regulations within an establishment in line with the principles laid down by laborlaws, Labor Audit is important component introduced. In this perspectivethe Act requires that Labor Audit shall be conducted within Mid-January of each year(End of Poush) through the employee of managerial level who meets the criteria prescribed by the concerned Ministry or through any individual or organization related to labor sector.[iii]In case where the Labor Office or the Invigilator claims to see the report of Labor Audit, then such shall be made available to them by the employer.[iv] The Labor Audit Standard also prescribes that the Labor Auditor shall possess minimum bachelor degree and shall have at least Two Years' experience in the management of any organization.[v]

The Ministry of Labor Employment and Social Security has introduced Labor Audit Standard 2018. The Standard articulates that the purpose of the Labor Audit is to effectively implement the legal provisions of Labor Act 2017 so that the employees' rights and benefits are secured for the purpose of enhancing industrial production.[vi] It further articulates that the Labor Audit intends to develop the standard of law and policy implementation, enhance ownership towards employer by minimizing employees'grievances, reducing the work load of surveillance, investigation and monitory of the Government and making responsible to the employer in terms of legal compliances. The Labor Act and Rules prescribes about thecontents that Labor Audit should includeensuring the employer has confirmed the adoption of Labor Act and have various provisions and benefits employees are entitled.

As per the Schedule of the Labor Rule 2018, the Labor Audit requires to demonstratedetails of employee based on their employment categorization, status of appointment of employees, attainment of work permit and work permission in case of foreign employees, employment agreement and major contents, engagement of children and interns, trainees' benefits on equal basis, part time employees, social security benefits, working hours, interval and overtime payment, transportation facilities for women workers, minimum remuneration, annual grade increment, time of salary payment and festival allowance, leave provisions and facilities, provident Fund and gratuity entitlement, medical and health insurance,  status of license if employees are outsourced from any outsourcing company, health and safety measures, formulation of by-laws by the entity and its distribution to concerned bodies and employees, conduction of performance appraisal, information about ongoing or settlement of individual and collective dispute settlement, status of any litigation, compromise, decision and judgment from Labor Court. Apart from arrangement of having contribution of social security fund, distribution of bonus and trade union are major contents to be briefed in the Labor Audit.[vii]

Regarding methodology of conducting the Labor Audit, the Standard mentions that the employer or the Labor Auditor shall carry various methods to finalize his report such as collection of overview of the employer and analysis of the details, field visit and observation of the employer, interview or other necessary methodology as required. In this process the employer is obliged to submit the actual description of the employer and employee, the remuneration to the Auditor and benefits and providing necessary support to the Labor Auditor.[viii]

The Labor Act 2017 requires the Labor Auditor to ensure the description mentioned in the Labor Audit shall be true and fair. The Labor Auditor requires to produce the report based on accurate scenario of the employer.[ix] The Auditor should be independent person and should not come under influence of any financial benefit or reassure from an employer.[x]Labor Auditor shall ensure that except any report need to be produced, important and confidential document should be kept on top confidence and avoid any disclosures.[xi]To avoid any intentional fallacy in the Labor Audit, the Labor Act has also provisioned penalty in such cases. The Act provides that if any false detail is found inLabor Audit, the Labor Auditor or entity presenting such false report are penalized for each time with the amount up to NPR 20,000 by Labor Office[xii] and requires to be produced to the Central Bank if it is related to banking and financial institutions, to the concerned District Administrative Office if it is related to Non-Governmental organizations and other concerned authorities related.[xiii]

The importance of conducting periodic and systemic Labor Audit introduced first time by the Labor Act 2017 is instrumental to ensure minimum standards and requirement enshrined in the Act and shall be adopted and followed by the employer. The audit process allows employers to proactively identify and correct their own gaps, problems of existing practices and compliances of the laws and regulation. The audit will also avoid the more costly alternative of having the problems addressed by legal action. The Labor Audit confirms that labor law compliances are properly carried out in a detailed, elaborated and systematic fashion and the employer gets an upper hand in the event of any difficulties or hassles created by the Government authorities and this works effectively even to keep interference by non-Government elements at bay.Because of these benefits and opportunity of avoidances of consequences, employers should treat Labor Audits just as seriously as financial audits they conduct annually.

As the legal audit is newly introduced provision, Auditor requires expertise knowledge of this Labor Audit function and labor laws and associated laws and regulation, conducting Labor Audit is not less challenging. Labor Audit stands different footing from financial audit, as Labor Audit is more operational aspect of functioning. Hence, the Labor Auditors are expected to conduct the audit functioning minutely and identify the areas of improvements. Labor Auditing aims to serve to spread awareness about large number of compliances requirement. The Auditor is also expected to deliver various suggestions regarding the areas of improvements and strategies to meet such requirements at the end of report. The audit report also expected to give references of particular provisions so that employers finds easier to trace out. Because of this various aspect to be inculcated into the report, the job of Labor Auditor is challenging and the function itself is challenging. Due to new provisions and lack of adequate information and practices, conducting legal audit for initial few years is challenging and the consequential threat posed by the Labor Act 2017 regarding penalty for any errors committed negligently or intentionally or under undue influence of the employer may not encourage the qualified individual to carry legal audit other than organized employer.
[i]Writ No- 935, 2027 BS, Supreme Court of Nepal, Supreme Court Precedent on  Labor Laws, Part 11, (2006)
[ii]Labor Act 2017, Section 100(1)
[iii]Labor Rule 2018, Rule 56(1) 
[iv]Labor Act 2017, Section 11(2)
[v]Labor Audit Standard 2018, Standard No 5
[vi]Labor Audit Standard 2018, Standard No 4
[vii]Labor Rule 2018, Schedule 10
[viii]Labor Audit Standard 2018, Standard No 7
[ix]Labor Audit Standard 2018, Standard No 8 (a)
[x]Labor Audit Standard 2018, Standard No 8 (b)
[xi]Labor Audit Standard 2018, Standard No 8 (c)
[xii]Labor Rule 2018,  Rule 56(3)
[xiii]Labor Rule 2018, Rule 56(4)

This article was also published in ICAN Journal. To read the journal click here

Saroj Krishna Ghimire

Saroj Krishna Saroj Krishna

About me

Saroj is an Attorney at Law and an Assistant Professor of Law at Tribhuvan University, Nepal. Saroj has advised high profile clients on investment and corporate matters and appears in all level of courts in large scales commercial litigation. He is one of the dynamic young lawyers of Nepal and have worked as local counsel for largest law firms worldwide. He advises international clients and immigration issues in Nepal Tax Online.

Social Links